Deloitte partner accused of improper trading in client stocks

(Crain's) -- A vice-chairman of Deloitte LLP in Chicago and a three-decade veteran of the city's business scene has been sued by the accounting giant, which accuses him of improperly trading in securities of auditing clients.

Thomas P. Flanagan, a lead partner over his career on major accounts including Sears Holdings Corp. and Walgreen Co., abruptly resigned from Deloitte in September, after the company confronted him about the allegations, according to the lawsuit, filed Oct. 29 in Delaware Chancery Court. The suit accuses him of violating firm rules by trading in securities of "at least 12" clients over at least three years, concealing the trades and "repeatedly" lying to Deloitte about the matter.

In addition, major Chicago companies, including Walgreen, Northbrook-based Allstate Corp. and Chicago-based USG Corp., disclosed in recent filings that Deloitte had informed them of trades in securities related to them by a "former advisory partner." Walgreen confirms that refers to Mr. Flanagan.

In its lawsuit, Deloitte says it was approached by a "regulatory agency" in August and asked to provide names for all staffers working on the audit of a specific client between January 2007 and June 2007.

The suit accuses Mr. Flanagan of purchasing stock in a publicly traded company his audit client was planning to acquire one week before the deal was announced.

Deloitte's filing in the case doesn't identify the client in question, but the timing of the acquisition referred to corresponds to Walgreen's $850-million acquisition of Buffalo Grove-based pharmacy services firm Option Care Inc., announced July 2, 2007.

"As it would turn out, this violation of (Deloitte's independence) policies was only the most recent in a years-long course of improper trading and concealment by Flanagan," says the lawsuit, which was first reported by the website Securitiesdocket.com.

In a recent filing, Deerfield-based Walgreen says, "Deloitte believes the former advisory partner engaged in trading in (Walgreen's) stock, or options related thereto, as well as common stock, or options related thereto, issued by Option Care Inc., which was acquired by the company in 2007."

A spokesman for Walgreen confirms that Mr. Flanagan is the "advisory partner" referred to in the filing. As an advisory partner, Mr. Flanagan "regularly attended meetings of the audit committees" of his clients, the lawsuit says.

While the lawsuit doesn't name the "regulatory agency" that contacted Deloitte, trading in public company shares is regulated by the U.S. Securities Exchange Commission (SEC), and the filings by Allstate and Walgreen indicate that Deloitte told the companies it believed the improper trading violated SEC rules on auditor independence.

In a statement, Deloitte says it "unequivocally condemns the actions of this individual, which are unprecedented in our experience. His personal trading activities were in blatant violation of Deloitte's strict and clearly stated policies for investments by partners and other professional personnel. Further, it appears that he intentionally skirted our system for reporting and tracking investments. We are taking this very seriously and are conducting our own investigation into the matter."

A call to Mr. Flanagan wasn't immediately returned.

Mr. Flanagan joined Deloitte predecessor firm Touche Ross in 1971 and rose to the top ranks of the firm becoming managing partner of the firm's Chicago office in 1986. Following the merger of Touche with Deloitte in 1989, he served as Midwest managing partner and was named vice-chairman in 2003.

He has been a major player on the city's civic scene for years, but the fallout from the Deloitte allegations appear to be bringing his role in that area to an end as well. On Monday, Mr. Flanagan resigned as treasurer of the Lyric Opera of Chicago after stepping down from the board of the Museum of Science and Industry in late October, according to spokeswomen for the organizations. He stepped down Oct. 31 from the board of the Boys & Girls Clubs of America.

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